<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
-----------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
--------------- ----------------
Commission File Number 0-12214
-------
DALECO RESOURCES CORPORATION
----------------------------------------------------
Name of small business issue as specified in Charter
Delaware 23-2860739
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
435 Devon Park Drive, Suite 410
Wayne, PA 19087 (610) 254-4199
- ---------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Issuer's telephone number)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after distribution under
a plan confirmed by court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date.
27,767,880 shares of common stock as of February 1, 1998
<PAGE>
INDEX
PART I FINANCIAL INFORMATION Page
ITEM 1 FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets 3
Consolidated Statement of Loss 4
Consolidated Statement of Deficit 5
Consolidated Statement of Cash Flow 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $560,551 $77,891
Accounts receivable 261,889 1,071,115
Other 11,474 137,031
------ -------
Total Current Assets 833,914 1,286,037
Investment in and advances to mining joint venture (note 3) --------- 100,000
Oil and gas properties and equipment (note 4) 7,018,296 5,302,945
Property and equipment 57,632 87,654
Timber rights (note 5) 1,028,342 1,028,342
Mineral properties (note 6) 23,973 15,673
Goodwill (note 16) 709,191 1,145,834
Debt Issue Costs 559,815 120,632
------- -------
Total Assets $10,231,163 $9,087,117
=========== ==========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $1,113,933 $2,210,553
Current portion of long-term debt 200,000 -----
Notes payable (note 7) ----- 800,000
Drilling deposits 613,408 29,000
Due to related parties (note 8) 349,590 498,537
------- -------
Total Current Liabilities 2,276,931 3,538,090
Long-term debt (note 10) 2,888,646 ------
Debentures (note 9) 60,000 880,000
------ -------
Total Liabilities 5,225,577 4,418,090
--------- ---------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
277,699 275,699
27,767,880 Common shares, par value $0.01 per share
160,000 Preferred Shares, par value $0.01 per share (note 7) 1,600 -----
Additional Paid in Capital 13,852,543 11,805,026
Accumulated deficit (9,126,256) (7,411,698)
----------- -----------
Total Shareholders' Equity 5,005,586 4,669,027
--------- ---------
Total Liabilities and Shareholders' Equity $10,231,163 $9,087,117
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Gross Operating Revenue $568,782 $527,457
Less: Lease operating expenses 109,440 128,811
Severance taxes 8,639 12,590
Depletion, depreciation and amortization 75,000 92,134
Net profits interest and related expenses 284,891 288,911
------- -------
Net income from oil and gas operations 90,812 5,011
------- --------
Administration expense 221,361 517,851
Amortization of debenture issue costs 9,250 17,233
Financial advisory expense ----- 93,651
Timber operations costs (note 5) 85,433 89,345
Interest expense 61,024 44,269
Amortization of goodwill 104,166 104,166
------- -------
481,234 866,515
Other Income
Management and administrative fees 86,129 121,911
------- -------
(395,105) (744,604)
--------- ---------
Net Loss for the Period $(304,293) $(739,593)
========== ==========
Basic and Fully Diluted Net Loss per Common Share $ (0.01) $ (0.04)
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deficit - Beginning of Period $(8,801,963) $(6,672,105)
Net loss for the period (304,293) (739,593)
Dividends on Preferred Stock (20,000) -----
------------ ------------
Deficit - End of Year $(9,126,256) $(7,411,698)
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Operating Activities
Net loss for the period $(304,293) $(739,593)
Items not affecting working capital
Depletion, depreciation, and amortization 179,166 92,134
Amortization of debt issue costs 9,250 17,233
--------- ---------
(115,877) (630,226)
Decrease (increase) in accounts receivable 46,694 (105,218)
(Decrease) increase in accounts payable (18,502) 894,149
Increase in advances received on well costs 345,408 -----
Decrease in other assets ----- (338,224)
---------- ---------
Cash provided (used) for operating activities 257,723 (179,519)
---------- ---------
Investing Activities
Drilling and lease acquisition costs incurred (1,502,763) (124,406)
---------- ---------
Cash used for investing activities (1,502,763) (124,406)
---------- ---------
Financing Activities
Increase (decrease) in amounts due to related parties ----- 113,631
Dividends Paid (20,000) -----
Proceeds from long-term debt 1,298,831 -----
---------- ---------
Cash provided from financing activities 1,278,831 113,631
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 33,791 (190,294)
Cash and Cash Equivalents - Beginning of Period 526,760 268,185
------- ---------
Cash and Cash Equivalents - End of Period $ 560,551 $ 77,891
======== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
======================================================================
1. Reference to Audited Financial Statements
These Financial Statements should be read in conjunction with the notes to
the Company's audited Financial Statements as of September 30, 1997.
2. Summary of Significant Accounting Policies
a. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
b. Basis of consolidation
The consolidated financial statements of Daleco Resources Corporation
(the "Company") have been prepared in accordance with generally
accepted accounting principles and include the accounts of the Company
and its wholly-owned subsidiaries Westlands Resources Corporation
("Westlands"), Sustainable Forest Industries Inc. ("Sustainable"),
Deven Resources, Inc. ("Deven"), Tri-Coastal Energy, Inc., ("TCE"),
Tri-Coastal Energy, L.P. ("TCELP"), and Haly Corp. The Company's
investments in oil and gas leases are accounted for using proportionate
consolidation whereby the Company's prorata share of each of the
assets, liabilities, revenues and expenses of the investments are
aggregated with those of the Company in its financial statements.
c. Oil and gas properties and equipment
The Company follows the successful efforts method of accounting for the
costs of exploration and development activities. Direct acquisition
costs of developed and undeveloped leases are capitalized. Costs of
undeveloped leases on which proved reserves are found are transferred
to proven oil and gas properties. Each undeveloped lease with
significant acquisition cost is reviewed periodically and a valuation
allowance provided for any estimated decline in value. Capitalized
costs of proved developed leases are charged to income on the units of
production basis based upon total proved reserves. The capitalized
costs of these proved developed leases are written down to their
projected net recoverable amount.
Costs of exploratory wells found to be dry during the year or before
the issuance of these financial statements are charged against earnings
in that year. Costs of successful exploration wells and development
wells are capitalized. All costs of development wells and successful
exploration wells are charged to earnings on a unit-of-production basis
based upon proved developed reserves. Where the costs of developed
wells and successful exploration wells exceed projected net recoverable
amounts, such wells are written down to their projected net recoverable
amount. Net recoverable amount is the aggregate of estimated
un-discounted future net revenues from proven reserves less operating
and production expenses.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
Effective in the first quarter of 1997, the Company began assessing the
impairment of capitalized costs of proved oil and gas properties and
other long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Under this method, the Company generally assesses its oil and gas
properties on a field-by-field basis utilizing its current estimate of
future revenues and operating expenses. In the event net undiscounted
cash flow is less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would consider discounted
future net cash flows. SFAS 121 did not have any impact on the
Company's change in method of assessing impairment of oil and gas
properties and other long-lived assets.
d. Site restoration, dismantlement and abandonment costs
The salvage value of producing wells is expected to exceed the cost of
site restoration and abandonment. As a result, no such costs are
accrued in these financial statements.
e. Property and Equipment
Property and equipment are recorded at cost and depreciated over the
straight-line method over a period of five years.
f. Mineral Properties
The Company has recorded the acquisition of mineral claims at cost.
These costs along with any future exploration and development costs
relating to mineral properties are deferred until the properties are
brought into production, at which time they are amortized on a
unit-of-production basis, or until the properties are abandoned or sold
or management determines that the mineral property is not economically
viable, at which time the deferred costs are written off.
g. Timber Rights
The Company has recorded the acquisition of timber rights at cost.
These costs are deferred until commercial production commences. Where
the costs exceed projected net recoverable amounts, the timber rights
are written down to the projected net recoverable amount. Net
recoverable amount is the aggregate of estimated un-discounted future
net revenues from the sale of timber less operating and production
expenses.
h. Debt Issue Costs
Debt issue costs as of December 31, 1997, represent those associated
with the Heller Financial, Inc. loan (see Note 10) and will be
amortized over a period of five years. Costs as of December 31, 1996,
were associated with the debentures and were written off upon
conversion of the debentures into common stock.
i. Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with original
maturities of three months or less.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
j. Goodwill
Goodwill associated with the acquisition of Deven Resources, Inc. will
be amortized over a period of three (3) years.
k. Fair Value of Financial Instruments
Cash and cash equivalents, receivables, and all liabilities have fair
values approximating carrying amounts, except for the Heller Financial,
Inc., and Sonata Investment Company, LTD., loans for which it is not
practicable to estimate fair values. The loans are to be repaid out of
net cash flows. Additional interest or profit participation is payable
after the payment of principal.
3. Investment In and Advances to Mining Joint Venture
The Company participated in an agreement dated March 12, 1980, (revised
October 18, 1980) to purchase 25% of the issued shares of Minera La Yesca,
a Mexican mining corporation. Funds were advanced to Minera La Yesca to
help finance the cost of placing the Pinabete Silver Mine (the "mine") in
Mexico into production. The investment in and advances to Minera La Yesca
have been recorded at cost. Due to operating losses resulting from the
continuing low price of silver, the mine was taken out of production
during 1991.
The investment in the advances to Minera La Yesca, which were recorded at
cost, has been written off during fiscal 1997.
4. Oil and Gas and Equipment
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Proven lease acreage costs $ 5,259,400 $ 3,726,855
Proven undeveloped lease acreage costs 1,906,220 1,906,220
Well costs 2,501,208 1,642,257
----------- ------------
$ 9,666,828 7,275,332
Accumulated depletion, depreciation and amortization 2,648,532 1,972,387
----------- ------------
$ 7,018,296 $ 5,302,845
=========== ============
</TABLE>
5. Timber Rights Acquisition
Effective September 29, 1995, the Company entered into an agreement
("Acquisition Agreement") to purchase 100% of the issued and outstanding
shares of the common stock of Sustainable Forest Industries Inc.
("Sustainable"), a privately held Delaware Company, in exchange for
1,500,000 shares of common stock of the Company.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
Prior to this, Sustainable entered into a Timber Acquisition Agreement on
September 27, 1995 with Oreu Timber and Trading Co., Ltd. ("Oreu"), a
Guyana Corporation which is an affiliate of May Joy Agricultural
Cooperative Society Ltd. ("May Joy"). Under the terms of the agreement,
Sustainable has been assigned the exclusive harvesting and cutting rights
for the timber concession issue by Permit No. 1367. This permit was
originally granted to May Joy who subsequently assigned harvesting rights
to Oreu as per an agreement dated January 3, 1995. In April 1997,
Sustainable was assigned the timber concession rights under Permit #4975.
In exchange for the timber rights, Oreu received a 10% ownership of
Sustainable. This ownership was subsequently converted to equivalent
shares of the Company as a result of the acquisition of Sustainable.
The acquisition has been accounted for by the purchase method. The
purchase price of $962,500 was determined based on the fair value of the
1,500,000 common shares of Daleco given up to acquire Sustainable. The
fair value of the net liabilities of Sustainable acquired was $65,842
resulting in consideration of approximately $1,028,500 which has been
recorded as timber rights.
During fiscal 1997, the Company obtained funds to permit Sustainable to
begin implementation of its business plan (see Note 10).
6. Mineral Properties
In February 1995, the Company acquired 109 mining claims from shareholders
of the Company for $15,673 representing their cost to acquire the claims.
Additional costs of $8,300 were incurred during fiscal 1997 to maintain
these claims. The Company is seeking interest from third parties for the
development of these claims.
7. Notes Payable
During the year ended September 30, 1995, the Company received $1,100,000
in return for two notes payable, with the producing wells of the Company
used as collateral. Interest of 10% per annum was due monthly.
During fiscal 1996, the Company repaid $300,000 of the outstanding
balance. During fiscal 1997, the remaining $800,000 was converted into
160,000 shares of 10% cumulative preferred stock, at $5.00 per share.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
8. Due to (from) Related Parties
1997 1996
Net due to Haly Corporation
Bearing interest at prime +1% $ ----- $283,993
-------- --------
Net due (from) to Amir and Erlich
Bearing interest at prime +3% 91,062 91,062
Bearing interest at 7% 258,528 123,482
-------- --------
349,590 214,544
-------- --------
$349,590 $498,537
======== ========
The amounts due to Haly Corporation were eliminated through the
acquisition of Haly as of September 30, 1997 (see Note 17). Amir and
Erlich are officers and shareholders of the Company. These amounts have no
fixed repayment terms.
9. Debentures
1997 1996
---- ----
8% Convertible $ 60,000 $ 880,000
======== =========
Debentures
a. 7% Convertible Debentures
On May 31, 1996 the Company issued $1,000,000 of 7% convertible
debentures with interest payable in cash or stock on a semi-annual
basis, and a term of three years. The placement agent's fees were 10%
of the gross proceeds and 100,000 warrants at $1.00, with an expiration
date of May 30, 2001 (see Note 11). The debentures could be converted
after a holding period of: (a) as to 50% of the principal amount, 40
days (July 10, 1996), and (b) the remaining 50%, 60 days (July 30,
1996). The debentures are convertible into the Company's common stock
at the lessor of (1) a 35% discount on the previous five day average
closing bid price at conversion, or; (2) the previous day average
closing bid price at closing (May 31, 1996). As of September 30, 1996,
$600,000 of the 7% debentures had been converted into 1,077,122 common
shares. The remaining balance was converted into 905,796 common shares
during 1997.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
b. 8% Convertible Debentures
On September 11, 1996, the Company issued $1,310,000 worth of 8%
convertible debentures with interest payable in stock only and accruing
until conversion or redemptions after the term of two years. The
placement agent's fees were 10% of the gross proceeds and 122,111
warrants at $1.07 expiring November 16, 2001. The debentures may be
converted after a holding period of 45 days after closing at the lessor
of: (1) the fixed conversion price ($1.0171875), or (2) 75% of the
average closing bid price for the five trading days immediately
preceding the date of conversion. As of September 30, 1997, $1,250,000
of the 8% debentures had been converted into 7,650,150 common shares.
10. Long-Term Debt
Long-term debt of the Company consists of the following:
a. Heller Financial, Inc.
During the forth quarter of fiscal 1997, the Company entered into an
arrangement with Heller Financial, Inc. ("Heller") whereby Heller has
agreed to provide the Company with up to $15,000,000 to rework existing
horizontal wells, recomplete its vertical wells as horizontal wells,
and develop additional acreage. Under the terms of the agreement, all
of the properties of Westlands were transferred to a newly formed
Limited Partnership, Tri-Coastal Energy, L.P., the general partner of
which is Tri-Coastal Energy, Inc., ("Tri-Coastal") and the sole limited
partner of which is Westlands. Westlands is also the sole shareholder
of Tri- Coastal. The amount outstanding under this arrangement as of
December 31, 1997, was $2,463,646. Interest on the borrowings is at
prime plus 2%. Principal is paid out of 85% of the net cash flow from
the properties. Additional interest is payable from 50% of the net cash
flow from these properties after the payment of principal.
b. Sonata Investment Company, LTD.
During the third quarter of fiscal 1997, Sustainable entered into a
loan agreement with Sonata Investment Company, LTD. for $250,000, which
remains outstanding as of September 30, 1997. Sustainable has the right
to request an additional $250,000 prior to December 31, 1999. The
Company and Westlands are guarantors of the loan with Westlands (now
Tri-Coastal Energy, L.P.) wells being pledged as collateral,
subordinated to the Heller Financing. The loan is to be repaid out of
25% of Sustainable's net cash flow with any remaining balance due by
December 31, 1999. Interest is at 12%. In addition, Sonata will receive
a profit's participation of 25% of the net profits of Sustainable while
the loan is outstanding and 20% after the loan is repaid ("after
payout"). Should Sustainable request the additional $250,000 from
Sonata and should Sonata elect not to make said advance, then the after
payout rate reduces from 20% to 15%.
c. PNC Bank Loan
During the fourth quarter of fiscal 1997, Deven Resources, Inc.
obtained a term loan of $300,000 with interest at prime plus 1 1/2%.
Principal is due at $25,000 per quarter. The loan is secured by
specific properties owned by Deven.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
d. First Regional Bank
As of September 30, 1997, the Company assumed a $100,000 loan with
First Regional Bank when it acquired Haly Corporation (see Note 17).
Interest is at 6.9% and the loan matures December 12, 1998. The loan is
secured by personal assets of an officer of the Company.
11. Capital Stock
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
NUMBER OF COMMON SHARES PAR VALUE
SHARES, PAR VALUE $0.01 PER SHARE
$0.01 PER SHARE AMOUNT
<S> <C> <C> <C>
Authorized 50,000,000 50,000,000
---------- ----------
Balance as at September 30, 1997 27,567,880 160,000 $14,086,131
Issued for Professional Services Rendered 200,000 ----- 45,711
---------- ---------- -----------
27,767,880 160,000 $14,131,842
========== ========== ===========
</TABLE>
Upon redomestication of the Company into the U.S. as of October 1, 1997,
par value was established at $0.01 per share for both common and preferred
stock.
a. Common Stock Options
In January 1995, the Company granted fully vested common stock purchase
options expiring on January 6, 2000 for 850,000 common shares at $0.25
per share. On the same date, the common stock purchase options
previously outstanding, which expired on September 5, 1995 for 356,704
common shares at $0.32 per share, were gifted back to the Company and
canceled. The following summary sets out the activity in common stock
purchase options:
Fiscal
1998 1997
- ------------------------------------------------------------------------------
Outstanding and Exercisable 350,000 850,000
at beginning of year
- ------------------------------------------------------------------------------
Canceled ----- (150,000)
- ------------------------------------------------------------------------------
Granted 1,200,000 -------
- ------------------------------------------------------------------------------
Exercised ------- -------
--------- --------
- ------------------------------------------------------------------------------
Outstanding and Exercisable
at end of year 1,550,000 700,000
========= =======
- ------------------------------------------------------------------------------
In the first quarter of fiscal 1998, the Company issued 1.2 million
Common Stock options at 21.875(cent) per share.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation," (SFAS 123). SFAS 123 permits the Company's
continued use of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25 (APB 25). FAS 123 requires
additional disclosures, including proforma calculations of net earnings
and earnings per share, as if the fair value method of accounting
prescribed by SFAS 123 had been applied. The fair value of stock
options and compensation cost are measured at the date of grant.
The common stock purchase options were issued for past services at an
exercise price of $0.25 per share when the underlying stock was at
$0.2245 per share. Had compensation cost been determined based on the
fair value of the common stock purchase options using the provisions of
SFAS 123, the Company's net loss and loss per share in 1995 would have
increased by $161,500 and $0.01, respectively.
For the proforma calculation, the fair value of each option on the date
of grant was estimated using the Black-Scholes option pricing model and
the following assumptions for awards in 1995: zero dividend yield
expected volatility of 119.64%, risk -free interest rate of 7.84%, and
expected life of 5 years. Using these assumptions, the grant-date fair
value per share of the options granted in 1995 was $0.19.
b. Common Stock Warrants
Common stock warrants outstanding at September 30, 1997, consist of the
following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Issuance Expiration Date Amount Price Per Share
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acquisition of Sustainable September 30, 2000 500,000 $0.35
- ------------------------------------------------------------------------------------------------------------------------------
Consulting Agreements May 8 2001 to
October 1, 2001 1,600,000 $0.35
- ------------------------------------------------------------------------------------------------------------------------------
Consulting Agreement September 30, 2001 100,000 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
8% Debenture Holders and September 11, 2001 to $0.4386 to
Placement Agents (I.) June 8, 2002 1,864,705 $1.081
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8% convertible debentures
in September 1996; a number of warrants were granted to the
holders of the debentures, the agents, and subagents who placed
the debentures.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
With respect to the warrants granted to the debenture holders and
subagents, the warrants were granted in three equal installments
of September 11, 1996; November 26, 1996; and June 8, 1997. These
warrants will expire five years from the date of each installment:
September 11, 2001; November 26, 2001; and June 8, 2002. The
number of shares of common stock into which the warrants may be
converted and the exercise price of the warrants were determined
by (among other variables and future events) the amount of
debentures still outstanding on each date of grant, and the
average closing bid price of the Company's common stock for the
five trading days immediately preceding each date of grant.
On September 11, 1996, a total of 122,111 warrants expiring on
September 11, 2001 were granted to the agents. The warrants may be
exercised at any time before the expiration date by either of the
two methods as follows: (1) each warrant may be exercised for one
common share with an exercise price of $1.073, or (2) all or a
portion of the warrants may be exercised on a cashless basis where
a reduced number of shares of common stock will be issued based
upon the difference between the average closing price of the
Company's common stock for the five business days immediately
preceding the date of exercise and the exercise price, divided by
the average closing market price, times the number of warrants
being exercised.
c. Net Income Per Share
Net income per share was calculated on the basis of the weighted
average number of shares outstanding which amounted to 27,767,880 for
the period ended December 31, 1997.
12. Income Taxes
The Company has no current and deferred taxes payable. The Company and its
subsidiary have significant tax losses to be applied against future
income. The subsidiary Company's tax filings show net operating losses to
be applied against future taxable income in the amount of approximately
$25 million to be utilized in various years through 2009. The tax benefit
of these losses is estimated to be approximately $10 million. No potential
benefit of these losses has been recognized in the accounts.
13. Segmented Information
Substantially all of the Company's operating activities are in oil and gas
exploration and development in the United States which is considered to be
the Company's domestic segment. In addition, the Company has a 100% owned
subsidiary involved in the harvesting of timber Concessions in Guyana.
There were no revenues from timber operations in 1997 and 1996.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
===============================================================================
The following table identifies customers of the Company who purchased
greater than ten percent of the oil and gas produced by the Company:
<TABLE>
<CAPTION>
1997 PERCENTAGE 1996 PERCENTAGE
OF OF
TOTAL SALES (%) TOTAL SALES (%)
<S> <C> <C>
Oil Production
Pride Pipeline Company 100% 100%
Gas Production
Aquila Southwest Pipeline Corporation 12.8% 16.6%
Austin Chalk National Gas Marketing 29.1% 27.4%
Services
New Brenen Corporation .8% 1.4%
Southern Natural Gas 57.3% 56.6%
</TABLE>
14. Employment Contracts and Commitments
In connection with the acquisition of Sustainable and under Management
Agreement dated April 17, 1995, the Company agreed to engage two key
officers for a period of seven years ending April 17, 2002. The two key
officers are entitled to a base salary of $75,000 plus additional
incentive payments each based upon a percentage of net income of
Sustainable. At the time of termination for any reason, the key officers
are entitled to a severance payment equal to the total of the annual base
salary plus additional annual incentive payments he is then receiving
multiplied by the remaining years, or portions thereof, of the contract
period. During fiscal 1997, the Company reached a settlement with one of
the officers in the total amount of $60,000 to be paid at $5,000 per month
through February 1998.
In connection with the acquisition of Deven and under the Stock Purchase
Agreement dated October 1, 1996, the Company agrees that should certain
Deven officers be involuntarily terminated, other than in response to the
Deven Officer's gross negligence, willful misconduct, ineptitude or
inability to perform the duties of his position, ("Involuntary Personnel
Action") on or before September 30, 2001 ("Coverage Period"), the said
Deven Officer who was the object of said Involuntary Personnel Action
shall be entitled to receive a sum equal to 150% of the aggregate base
salary plus the cash equivalent of all benefits for the period of time
between the date of the Involuntary Personnel Action and the remaining
portion of the Coverage Period ("Settlement Consideration").
However, the Settlement Consideration shall not be less than two years
severance even though the period between the Involuntary Personnel Action
and the expiration of the Coverage Period be less than two years.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
The Company had two contracts with financial advisors during fiscal 1997.
The first expired in May 1997; the second expired October 31, 1997.
Neither contract was renewed.
The Company had two office leases as of December 31, 1997. The first calls
for rent of $3,864 per month through June 30, 1998. The second lease calls
for rent of $3,354 per month through December 31, 1999.
15. Litigation Settlement
In April 1997, the Company commenced an Adversary Action styled Daleco
Resources Corporation v. Reserve Production Inc., Liquidating Trust and
Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No. 97-6036. The case was
commenced to enforce the Company's rights under that certain Asset
Purchase Agreement dated December 20, 1996 ("Asset Purchase Agreement") as
approved by the Bankruptcy Court on February 13, 1997. In the Adversary
Action, the Company alleged that the defendants' had failed to meet their
conditions to Closing under the Asset Purchase Agreement and were thus
required to refund the Company's $100,000 Earnest Money Deposit and pay
for the reworking of the Jody Well. Subsequent to the commencement of the
Company's adversary action, a case was commenced in the United States
District Court for the Eastern District of Texas, Tyler Division, styled
Reserve Production Liquidating Trust v. Daleco Resources Corporation,
Westlands Resources Corporation, David F. Lincoln, Gary J. Novinskie and
C. Warren Trainor, C.A. No.: 6:97 CV 705 ("District Court Action"). The
District Court Action was in essence a counter claim against the Company
and three of is directors asserting matters which should have been
addressed in an answer to the Adversary Action. The Company filed a motion
to dismiss the District Court Action; however, prior to ruling on the
Company's Motion, the Adversary Action was resolved through Court mandated
mediation. Under the terms of the settlement, the Company's Earnest Money
Deposit was returned and the Reserve Production Inc., Liquidating Trust,
Reserve Production Liquidating partnership, and Leonard Pipkin, trustee,
were required to resolve all outstanding claims for the reworking of the
Jody Well.
The Company incurred $224,875 in costs to settle this litigation in Fiscal
1997.
16. Acquisitions
During fiscal 1997, the Company completed the acquisitions of Deven
Resources, Inc. and Haly Corporation.
All of the outstanding stock of Deven was acquired on October 1, 1996 in
exchange for 2.6 million shares of Daleco stock plus $150,000 in cash. The
market value of the stock was approximately $2.4 million. The acquisition
was accounted for as a purchase resulting in oil and gas properties of
$1.5 million, goodwill of $1.25 million less liabilities assumed of
$200,000. Deven receives an annual management fee of $200,000 from a
partnership of which it has a 1% general partner interest.
All of the outstanding stock of Haly, a related party, was acquired on
September 30, 1997. Daleco issued 3 million shares of common stock to
Messrs. Amir and Erlich along with $1,000 cash. In exchange, the Company
received and retired 3 million shares of common stock owned by Haly along
with interests in wells owned by Haly. The acquisition was accounted for
as a purchase. The amounts due Haly were written off into common stock
less the First Regional Bank loan assumed by Daleco (see Note 11).
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND 1996 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
----------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Reform
Act") provides a safe harbor for forward-looking statements made by
or on behalf of the Company. All statements, other then statements of
historical facts, which address activities, event or developments
that the Company expects or anticipates will or may occur in the
future, including such things as the anticipated development of
revenues, acquisition of additional properties or the obtaining of
capital, business strategy, development trends in the industry
segments in which the Company is active, expansion and growth of the
Company's business and operations and other such matters are
forward-looking statements. To take advantage of the safe harbor
provisions provided by the Reform Act, the Company is identifying
certain factors that could cause actual results to differ materially
from those expressed in any forward-looking statements, whether oral
or written, made by or on behalf of the Company. Many of these
factors have previously been identified in filings or statements made
by or on behalf of the Company.
All phases of the Company's operations are subject to influences
outside of the Company's control. Any one, or a combination, of these
factors could materially affecting the results of the Company's
operations. These factors include: competitive pressures, inflation,
trade restrictions, interest rate fluctuations and other capital
market conditions, weather, future and options trading in, and the
availability of natural resources and services from other sources.
Forward-looking statements are made by or on behalf of the Company's
knowledge of its business and the environment in which it operates,
but because of the factors listed above, as well as other
environmental factors over which the Company has no control, actual
results may differ from those in the forward-looking statements.
Consequently, all of the forward- looking statements made are
qualified in their entirety by these cautionary statements and there
can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially
realized, that they will have the expected effect on the business
and/or operations of the Company.
The Quarter ended December 31, 1997, was marked by a number of events
which, in the long run, will strengthen the Company and enable it to
sustain future growth. These events include: the successful
completion of the drilling operations in the initial three (3) wells
(Phase I) of the planned twenty-five (25) well drilling program on
the Company's subsidiary's 7,300 acre lease block along the Upper
Texas Coast Austin Chalk Trend. In addition, the Company took steps
to expand its oil and gas holdings by entering into Letters of Intent
to acquire various producing and development properties located in
Kansas and Oklahoma.
The Company's Sustainable Forest Industries subsidiary also was able
to advance its sales and marketing program specifically in its marine
industrial and outdoor residential construction product lines.
Commercial sales were recorded in January 1998. The reduction in
administration expenses reflects the consolidation of accounting
operations into one location in Wayne, Pennsylvania. In addition, no
Financial Advisory Agreements were renewed subsequent to September
30, 1997.
PART II. OTHER INFORMATION
-----------------
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DALECO RESOURCES CORPORATION
Date: February 11, 1998 Gary J. Novinskie
-----------------------
Gary J. Novinskie
President
Date: February 11, 1998 Edward J. Furman
-----------------------
Edward J. Furman
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
CONSOLIDATED THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000746967
<NAME> DALECO RESOURCES CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 560,551
<SECURITIES> 0
<RECEIVABLES> 261,889
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 833,914
<PP&E> 9,666,828
<DEPRECIATION> 2,648,532
<TOTAL-ASSETS> 10,231,163
<CURRENT-LIABILITIES> 2,276,931
<BONDS> 0
1,600
0
<COMMON> 277,699
<OTHER-SE> 4,726,287
<TOTAL-LIABILITY-AND-EQUITY> 10,231,163
<SALES> 568,782
<TOTAL-REVENUES> 568,782
<CGS> 477,970
<TOTAL-COSTS> 481,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,024
<INCOME-PRETAX> (304,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (304,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (304,293)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
